Magellan Health Reports Second Quarter 2014 Financial Results

Updates 2014 Guidance

July 25, 2014 06:41 AM Eastern Daylight Time

AVON, Conn.--(BUSINESS WIRE)--Magellan Health, Inc. (NASDAQ:MGLN) today reported financial results for
the second quarter 2014, as summarized below. For the quarter ended June
30, 2014, the company reported net revenue of $888 million, segment
profit of $45 million and net income of $5 million, or $0.18 per diluted
common share.

Second Quarter Financial Results1

Three Months Ended June 30, 2014

Six Months Ended June 30, 2014

(Millions, except per share results)

2014

2013

Increase/

2014

2013

Increase/

(Decrease)

(Decrease)

Revenue

$888.0

$842.7

5.4%

$1,854.5

$1,664.5

11.4%

Segment Profit2

45.0

75.0

(40.0%)

121.5

144.3

(15.8%)

Net Income

5.0

31.5

(84.1%)

30.7

59.5

(48.4%)

Adjusted Net Income3

11.0

31.5

(65.1%)

38.3

59.5

(35.6%)

Earnings per Share

0.18

1.15

(84.3%)

1.10

2.17

(49.3%)

Adjusted Earnings per Share3

0.39

1.15

(66.1%)

1.37

2.17

(36.9%)

Revenue increased due to the inclusion of Partners Rx and CDMI in the
current year quarter, new business and rate increases, partially
offset by the loss of revenues associated with terminated contracts.

Segment profit decreased mainly due to terminated contracts and
unfavorable care trends in Public Sector and rate changes in Specialty
Solutions. These decreases were partially offset by stronger results
in the Commercial and Pharmacy Management segments.

Adjusted Net Income and Adjusted Earnings per Share decreased mainly
due to decreased segment profit, and a higher effective tax rate as a
result of non-deductibility of the Health Insurer Fee and valuation
allowances for certain deferred tax assets.

1 Included in the tables issued with this press release are
the reconciliations from non-GAAP measures to the corresponding GAAP
measures.

2 Segment profit is equal to net revenues less the sum of
cost of care, cost of goods sold, direct service costs and other
operating expenses, and includes income from unconsolidated
subsidiaries, but excludes segment profit or loss from non-controlling
interests held by other parties, as well as stock compensation expense.

3 Adjusted net income and adjusted earnings per share (EPS)
reflect certain adjustments made for acquisitions completed after
January 1, 2013 to exclude non-cash stock compensation expense resulting
from restricted stock purchases by sellers, as well as amortization of
identified acquisition intangibles.

Year-to-date through Monday, July 21, 2014, the company repurchased
approximately 1.4 million shares for a total cost of $81.3 million, at
average price of $59.75, and to date has completed approximately 66
percent of the current $300 million authorization. As of June 30, 2014,
the company had unrestricted cash and investments of $194.7 million.

The company also announced a new five-year $500 million credit facility,
including a $250 million term loan, and a $250 million revolver and
letter of credit facility.

“It’s a particularly exciting time for Magellan Health,” said Barry M.
Smith, chairman and chief executive officer. “We are making great
strides on our Magellan Complete Care of Florida and pharmacy management
strategies, and taking the steps to ensure Magellan has the resources to
aggressively grow in the future.

“I’m very pleased with the successful launch of our Magellan Complete
Care of Florida plan in the first two regions, as we prepare to go-live
in the remaining regions. This is a key milestone for our organization,
and we are particularly proud of our operational success thus far,
including our robust outreach and onboarding efforts. To provide
exceptional service and care, MCC of Florida has grown to nearly 300
employees over the past few months, and we have expanded our network to
more than 16,000 providers across the state.”

Results and Outlook

“Our segment profit for the second quarter reflects strong performance
in our Pharmacy segment, solid results in Commercial and Specialty
Solutions, and challenges in the Public Sector, as a result of
higher-than-expected cost of care in behavioral health and investments
in Magellan Complete Care,” said Jonathan N. Rubin, chief financial
officer. “We have plans in place to address the cost of care issues over
the balance of the year.

“Capitalizing on the current favorable credit markets, we have put in
place a new five-year credit facility to provide capacity for future
investments. This facility will allow Magellan to continue to grow its
business, while efficiently deploying capital to maximize shareholder
return.”

The company reaffirmed its 2014 guidance ranges for full-year net income
of $53 million to $69 million, segment profit of $238 million to $258
million, and cash flow from operations of $204 million to $226 million,
excluding the net shift of restricted funds between cash and
investments. The company updated its guidance for diluted earnings per
share to a range of $1.90 to $2.47 per share, based on updated fully
diluted shares 27.9 million. This updated share amount reflects share
repurchases and option exercises through the close of business on July
21, 2014, but excludes any potential activity that may occur during the
remainder of the year. The company also reaffirmed its 2014 guidance
range for full-year adjusted net income of $74.5 million to $92.5
million, which results in adjusted earnings per share of $2.67 to $3.32.

Earnings Conference Call

Management will host a conference call at 11 a.m. Eastern time on
Friday, July 25, 2014. To participate in the conference call, interested
parties should call 1-800-857-1812 and reference the pass code Second
Quarter Earnings Call 2014 approximately 15 minutes before the start
of the call. The conference call will also be available via a live
webcast at Magellan’s investor relations page at MagellanHealth.com.

About Magellan Health: Headquartered in Avon, Conn., Magellan
Health, Inc. is a healthcare management company that focuses on
fast-growing, complex and high-cost areas of healthcare, with an
emphasis on special population management. Magellan delivers innovative
solutions to improve quality outcomes and optimize the cost of care for
those we serve. Magellan’s customers include health plans, managed care
organizations, insurance companies, employers, labor unions, various
military and government agencies, third party administrators,
consultants and brokers. For more information, visit MagellanHealth.com.

Cautionary Statement

This release contains forward-looking statements within the meaning of
the Securities Exchange Act of 1934 and the Securities Act of 1933, as
amended, which involve a number of risks and uncertainties. All
statements, other than statements of historical information provided
herein, may be deemed to be forward-looking statements including,
without limitation, statements regarding estimates of 2014 net income,
adjusted net income, segment profit, cash flow from operations, earnings
per share, adjusted earnings per share, capital deployment, growth and
strategy. These statements are based on management’s analysis, judgment,
belief and expectation only as of the date hereof, and are subject to
uncertainty and changes in circumstances. Without limiting the
foregoing, the words “believes,” “anticipates,” “plans,” “expects,”
“may,” “should,” “could,” “estimate,” “intend” and other similar
expressions are intended to identify forward-looking statements. Actual
results could differ materially due to, among other things, the possible
election of certain of the company’s customers to manage the healthcare
services of their members directly; changes in rates paid to and/or by
the company by customers and/or providers; higher utilization of health
care services by the company’s risk members; delays, higher costs or
inability to implement new business or other company initiatives; the
impact of changes in the contracting model for Medicaid contracts;
termination or non-renewal of customer contracts; the impact of new or
amended laws or regulations; governmental inquiries; litigation;
competition; operational issues; health care reform; and general
business conditions. Additional factors that could cause actual results
to differ materially from those reflected in the forward-looking
statements include, but are not limited to, the risks discussed in the
“Risk Factors” section included within the company’s Annual Report on
Form 10-K for the year ended December 31, 2013, filed with the
Securities and Exchange Commission on March 3, 2014, and the company’s
subsequent Quarterly Reports on Form 10-Q filed during 2014. Readers are
cautioned not to place undue reliance on these forward-looking
statements. The company undertakes no obligation to publicly revise
these forward-looking statements to reflect events or circumstances that
arise after the date of this release. Segment profit information
referred to herein may be considered a non-GAAP financial measure.
Further information regarding this measure, including the reasons
management considers this information useful to investors, are included
in the company’s most recent Annual Report on Form 10-K and on
subsequent Form 10-Qs.

MAGELLAN HEALTH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands, except per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

2013

2014 (1)

2013

2014 (1)

Net revenue:

Managed care and other

$

746,720

$

682,274

$

1,469,309

$

1,511,865

PBM and dispensing

96,028

205,740

195,200

342,624

Total net revenue

842,748

888,014

1,664,509

1,854,489

Costs and expenses:

Cost of care

537,630

481,617

1,062,657

1,087,325

Cost of goods sold

90,175

192,566

183,687

317,864

Direct service costs and other operating expenses (2)

144,497

179,034

284,124

343,756

Depreciation and amortization

16,946

22,480

33,116

42,709

Interest expense

792

2,004

1,402

2,840

Interest income

(358)

(275)

(711)

(586)

Total costs and expenses

789,682

877,426

1,564,275

1,793,908

Income before income taxes

53,066

10,588

100,234

60,581

Provision for income taxes

21,586

6,261

40,696

31,874

Net income

31,480

4,327

59,538

28,707

Less: net income (loss) attributable to non-controlling interest

-

(659)

-

(1,999)

Net income attributable to Magellan Health, Inc.

$

31,480

$

4,986

$

59,538

$

30,706

Weighted average number of common shares outstanding — basic

26,829

27,144

26,968

27,257

Weighted average number of common shares outstanding — diluted

27,338

27,765

27,492

27,908

Net income per common share attributable to Magellan Health, Inc. -
basic

$

1.17

$

0.18

$

2.21

$

1.13

Net income per common share attributable to Magellan Health, Inc. -
diluted